Public advertising of offerings open to accredited investors only

Under the new Rule 506(c), promulgated by the SEC pursuant to the JOBS Act, a venture will be able to advertise a securities offering as long as all the investors are accredited.

Under the existing Rule 506 (aka Rule 506(b)), public advertising is prohibited. An issuer will now be able to choose between using the “old” Rule 506, which does not allow public advertising, or the “new” Rule 506 which does allow public advertising but adds some requirements to the process. For example, under the “old” Rule 506, investors could sign a document stating that they were accredited. Under the “new” Rule 506, the issuer will be responsible for doing due diligence to ensure that all investors are accredited.

When offering securities under either the old or the new Rule 506, the issuer must file a Form D with the SEC. But under the new Rule 506, the form must be filed no later than 15 calendar days prior to the first use of general solicitation or general advertising for the offering (called an “Advance Form D”). Under the old Rule 506, you do not have to file the Form D until 15 calendar days after the first sale of securities.

The Form D will be amended to include more questions such as

• The issuer’s web site
• The amount raised from accredited versus unaccredited investors
• What fraction of offering proceeds was or will be used to repurchase/retire existing securities; to pay offering expenses; to acquire assets, otherwise than in the ordinary course of business; to finance acquisitions of other businesses; for working capital; or to discharge indebtedness
• The basis of qualification of accredited investors
• If you are using Rule 506(c), the types of advertising to be used
• If you are using Rule 506(c), how you will verify that all investors are accredited

If an issuer under Rule 506(c) is unable to or chooses not to answer all the questions in the Advance Form D, the issuer is required to file an amendment providing the remaining information within 15 calendar days after the date of first sale of securities in the offering.

Can you switch from a private offering (under old Rule 506) to a public offering under Rule 506(c)? Yes! All you would need to do is file an amended Form D 15 days before beginning general solicitation.

The SEC is also requiring temporarily that advertising materials used under Rule 506(c) be submitted to the SEC on its web site.

Under the proposed rule, the following statements are required to be included on written advertising materials:

• The securities may be sold only to accredited investors, which for natural persons, are investors who meet certain minimum annual income or net worth thresholds;
• The securities are being offered in reliance on an exemption from the registration requirements of the Securities Act and are not required to comply with specific disclosure requirements that apply to registration under the Securities Act;
• The Commission has not passed upon the merits of or given its approval to the securities, the terms of the offering, or the accuracy or completeness of any offering materials;
• The securities are subject to legal restrictions on transfer and resale and investors should not assume they will be able to resell their securities; and
• Investing in securities involves risk, and investors should be able to bear the loss of their investment.

There are additional statements required for private funds.

The new rule also requires the filing of a final amendment to Form D within 30 calendar days after the termination of any offering conducted in reliance on Rule 506 (old or new).

The new rule has not yet gone into effect – there is a comment period on the rule that is currently open. The final rule is expected to be adopted in the next month or two.

Will there be new requirements under state securities law for offerings under Rule 506(c)? There may very well be – it is important to check applicable state requirements before beginning a public offering under Rule 506(c).

For more information on the proposed rule, visit the SEC web page: and look at the release called “Amendments to Regulation D, Form D and Rule 156 under the Securities Act.”

PART TWO: Section 4(2), Unregistered Public Offerings, and Offering Rescission

By Daniel Roberts, Attorney at Katovich & Kassan Law Group

So, say you own a startup company that’s trying to raise seed funding to create the next great software platform for social change, such as Kiva or Echoing Green.

You’ve exhausted all your personal finances, maxed out your credit cards.  You’ve already taken on some investment capital from family and friends—now it’s time to really scale and hire a bunch of software designers, developers, and other employees to turn your brainchild into reality.  Where can you find $5 million to achieve this next phase of growth?  You search your networks, but you’re only 90% successful.  You realize that although you’ve secured $4.5 million from the accredited investors in your network, you’re not going to get that last $500,000 without taking on non-accredited investors.

Rule 506 and Non-Accredited Investors

It is completely legal to sell equity security interests in a private placement to non-accredited investors who meet the requirements under Regulation D.[1]  However, selling to non-accredited investors triggers an additional (and very onerous) disclosure requirement[2]—and there must be no more than 35 of them.

But what happens if you just happen to sell to too many non-accredited investors, or otherwise fail to meet the requirements of the Rule 506 Safe Harbor?

Under federal law, even if an offering exceeds the Rule 506 Safe Harbor, it may still conform to the broad exemption of Section 4(2) of the 1933 Act, which exempts from registration “transactions by an issuer not involving any public offering.”  The legal lines of what defines a “public offering” are not tightly drawn.[3]  If the offering really wasn’t a private offering, investors may have a federal rescission right under Section 12 of the 1933 Act.

At the state level, the result of failing to meet the requirements of Rule 506 is that the registration exemption provided by Rule 506 no longer applies.  Without the safe harbor exemption, an issuer must analyze the offering in the context of the laws of each of the states where the securities were sold.

Just like under federal law, a sale of securities must be registered with state regulators—unless an exemption from registration applies.  In some states, limited offering exemptions may apply if securities were only sold or offered to a small number of investors.[4]  In such cases, an issuer may never have to register the securities or face penalties from the regulators, and may only be required to file notice with the state.  If no state registration exemption is available, an issuer may be able to file a registration statement with the state securities regulator retroactively.  Even so, an issuer may still face administrative fines or other penalties at the state level for offering and selling securities in the absence of a valid registration.


If an issuer has sold securities illegally, and there is no way to make the sale legitimate after the fact, the issuer can be held liable to investors who bought the unregistered securities.  Under many state laws, the only way to “clean up” the problem of having sold unregistered securities is by offering investors the right to rescind their investment.

The legal term “rescission” simply means an undoing or cancelling of a transaction.  In the context of securities law, it means offering an investor back the money she paid to buy the securities, plus interest.  Offering an investor the option to rescind his or her investment will in most cases extinguish the investor’s right to sue the issuer for failing to properly register the securities.[5]  Although a rescission offer may extinguish civil liability as to the investor, it does not necessarily extinguish enforcement liability as to the regulators.  Even so, regulators whose job it is to protect their constituents, generally favor voluntary rescission offers bigolive pc and will tend not to prosecute the underlying misstep in the absence of outright fraud.

A rescission offer can be a useful tool to avoid liability to shareholders not only when a company may have violated the securities registration requirements, but also if it has provided investors with misinformation or omitted material information.  Practitioners should be forewarned however, that a rescission offer will often be considered an offer of securities.  In such instances, rescission offers must conform to the registration requirements of state and federal law, and may require the submission of a prospectus with updated financial statements to regulators prior to making the offer.  In some states, the securities regulators provide simple form-letters for offering rescission, which greatly simplify the process.[6]

Generally speaking, offering rescission can be an extensive process, often requiring the prior approval of regulators before offers can be made to a company’s investors.  The drain on resources can be immense and time consuming—whether or not investors choose to accept their money back.  If there is a lesson to be learned here, it is to follow the rules when selling securities privately—the first time through.

READ PART ONE: Mistakes in Private Placements: Navigating the Quagmire


[1]  17 CFR 230.506, N. 2. “Each purchaser who is not an accredited investor either alone or with his purchaser representative(s) has such knowledge and experience in financial and business matters that he is capable of evaluating the merits and risks of the prospective investment, or the issuer reasonably believes immediately prior to making any sale that such purchaser comes within this description.”

[2] Under Rule 506, companies must give non-accredited investors disclosure documents that are generally the same as those used in registered offerings. (See 17 C.F.R. § 230.502(B)(2)).  If a company provides information to accredited investors, it must make this information available to non-accredited investors as well.

[3]  In Securities and Exchange Commission v. Ralson Purina, 346 U.S. 119 (1953), the Supreme Court laid out the factors that more clearly define what constitutes a public offering.

[4] For example, Colorado exempts offerings to fewer than 20 investors. Colorado Securities Act, § 11-51-308.

[5] See Model Uniform Securities Act, Section 510.

[6] See, e.g. New Hampshire rescission offer letter, found at

ComCap17: It’s About Democracy

ComCap17: It’s About Democracy

“[T]his is a fundamentally pluralist vision, in which multiple forms of public, private, cooperative, and common ownership are structured at different scales and in different sectors to create the kind of future we want to see. The vision begins and ends with the challenge of community. If it does not meet the test of everyday life in the communities in which we Americans live, it does not meet the test of serious long term change.”

Gar Alperovitz writes these words in his introduction to Principles of a Pluralist Commonwealth – in which he shares his vision of a new political economy. In it, he explains how a transformation in the ownership of capital is at the very core of the changes that are needed on the path toward a system that works for all and not just for the wealthiest few.

At last week’s ComCap17 conference in Monterey, we collectively put these words into practice. We brought the ideal down to the ground level and worked through how to actually create these diverse forms of ownership. And indeed, perhaps the most important theme that emerged in the conference is that there are a variety of effective tools in our toolbox to help us get there.

To be sure, much of the discussion at ComCap17 was about one particular collection of strategies – state securities exemptions for intrastate crowdfunding, which is now available in some 37 states. But as pointed out by a number of speakers, including my team from Cutting Edge Capital, there are several other strategies available to raise community capital, including direct public offerings and community investment funds.

And clearly, there is no one-size-fits-all. Each strategy has its advantages and disadvantages, and each has a “sweet spot” where it is most effective. For example, where an enterprise wants to raise capital directly from its community:

  • State-specific exempt crowdfunding can work well for small offerings where the investors are all within one state.
  • Exempt crowdfunding under Reg CF (Title III of the JOBS Act) can be effective for offerings up to $1 million where investors are in multiple states.
  • Intrastate direct public offerings are usually best for larger raises (i.e. any amount over the applicable exempt crowdfunding limit) where investors are all in one state.
  • Rule 504 offerings are often best for offerings up to $5 million where investors are in multiple states.
  • Regulation A offerings are best for offerings from $5 million to $50 million where investors are in multiple states.

Of course, these strategy choices are more nuanced than this, and a big part of our work at Cutting Edge Capital is helping our clients figure out which strategy among these and others best aligns with their values and strategic goals. (And then, together with our sister law firm Cutting Edge Counsel, we take our clients through the regulatory process until they have raised the capital they need.)

And yet, even these direct offering strategies are just the beginning. Indeed, most of them remain underutilized. It remains that case that a typical person living in a typical American town has virtually no local investment options; or if such options exist, they are hard to find. So how do we move the needle much faster toward a world in which community capital is truly ubiquitous and everyone has opportunities to invest locally in any town in America?

Community investment funds are the key to scaling up community capital and taking it from the fringe to the mainstream – whereby everyone thinks about local investing before they think of investing in Wall St. Besides scalability, community investment funds also have the advantages of diversification and greater efficiency in raising community capital, and they can typically offer more liquidity (that is, opportunities to get your money back) than a typical business can.

With investment funds, there are strict legal limits on what can be done, but as with capital-raising strategies, there is an array of options – which my partner Kim Arnone and I described in our ComCap17 workshop on Wednesday morning. A few options that allow a community-scale fund to raise capital from the community include:

  • Charitable loan funds, which raise debt investment and deploy it for some charitable purpose.
  • Real estate funds, which could focus, for example, on urban revitalization, agricultural land preservation, or affordable housing.
  • Supplemental funds that are an outgrowth of some other primary business, such as business services, co-working space, incubator, or grocery coop.
  • Intrastate funds up to $10 million – though these require explicit SEC approval.

And that’s still not all; there are other innovative strategies not mentioned here that can be explored. The community capital movement is ripe for creative thinking about what could be, and what is possible under the law.

At ComCap17, there was much discussion about new laws or changes in the laws that would help our movement; and at Cutting Edge Capital we have our own wish list of changes we believe would help boost this movement. But let’s not let imperfections in the laws distract us from the fact that most of what is described here can be done in every state in the U.S. today. There’s no need to wait.

In the big picture, what we’re doing in this movement is taking back our economy, restoring economic power to communities, and leveling the playing field so that everyone of every economic class has an opportunity to participate fully and reap the benefits of our economy.

But at a deeper level, this movement is about more than just the economy. As Teddy Roosevelt said, “There can be no real political democracy unless there is something approaching an economic democracy.”

Community capital is about true democracy. Let’s make it happen!



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